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Top Ten CGL Considerations for the Construction Lawyer
Message from the Chair-Elect
Identifying and Avoiding Financially Distressed Contractors
Project Neutrals to the Rescue!
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Thank You to Our 2010 Annual Meeting Sponsors
The Forum Student Writing Competition
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Project Neutrals to the Rescue! A New Tool for Avoiding and Resolving Disputes on Construction Projects
By Kurt Dettman, Suzanne Harness and John Carpenter
The construction industry has long been a laboratory for generating disputes and claims—and also for finding innovative ways to resolve them using a wide array of tools from the dispute resolution tool box. A recent trend in this area is the increasing use of project neutrals. Project neutrals can fill a variety of roles—they can be neutral experts who are called upon to render expert opinions to the parties; they can be facilitators of partnering processes and negotiations; they can be "on-call" neutrals who are activated only if a claim needs third-party input; and they can be "standing" neutrals who meet regularly with the parties to discuss issues and disputes throughout the life of the project. Their use is becoming more widespread as construction lawyers and their clients discover that project neutrals provide the kind of "real time" intervention that can help project participants resolve their disputes quickly and cost effectively.
The most obvious evidence of this trend is that the construction industry’s standard form agreements are now offering choices that encourage the use of project neutrals early in the disputes process. For example, the 2007 edition of AIA Contract Documents® introduce a third-party neutral for deciding claims, called the Initial Decision Maker, and the 2007 ConsensusDOCS allow the use of a project neutral or dispute review board as an alternative to mediation. This article discusses the use of project neutrals under those standard form agreements. Additionally, it discusses several topics that the construction lawyer will want to consider when advising a client about how to select and work with project neutrals, such as criteria for neutral selection, how claims are presented and decided, the neutral’s authority, and the effect of the neutral’s decision.
I. Using Project Neutrals
A. The Architect as Decision Maker
The use of a third party to decide construction contract disputes originated in this country with the first AIA owner/contractor agreement, written in 1888. In that document, the contractor was directed to refer to the architect any questions about the accuracy and completeness of the plans and specifications and requests for additional payment. As between the owner and contractor, the Architect was considered to be neutral, and its decisions on these matters were deemed, in the words of the contract, to be “just and impartial.” If the contractor didn’t agree with any decision of the architect, it had to proceed with the work, but could appeal the architect’s decision to a three-member arbitration panel.
The process under the AIA documents of the Architect serving as the neutral for issues involving the owner and contractor remained generally unchanged until 2007. Over time it was refined into a formal claims process whereby both the contractor and the owner were required to submit claims to the Architect for an initial decision. The initial decision was binding on the parties, so it served to keep the project moving along, but was always subject to arbitration. Starting in 1997 and continuing today, the decision was subject first to mediation and then to arbitration, if the mediation failed to resolve the dispute. The initial decision took on great importance because it was required as a condition precedent to any further dispute resolution process.
In 2007, the AIA offered the parties the choice of continuing to use the architect to make initial decisions or to retain another party for that role. The Architect, or other party, serving as the initial decision maker (IDM) can be considered an on-call project neutral, because he or she is not required to meet with the parties regularly during the course of the project and is called upon to address issues and disputes only when they arise.
B. The Dispute Review Board
Since the mid-1970s many public projects have used a form of project neutral known as a Dispute Review Board or a Dispute Resolution Board (DRB). DRBs have been more commonly used in tunneling and other large complex horizontal construction projects, but the process is now being used in a much more diverse array of projects, such as hospitals and airport terminals.
A DRB is typically a panel of three neutrals, usually with an engineering and construction background related to the type of project being built. Sometimes a DRB will include only one neutral, known as a “single person DRB” or a “Dispute Resolution Advisor.”
Usually, the DRB is appointed at the beginning of the project and remains in place until the project is completed. The DRB meets regularly with the parties to hear issues and disputes, so it is considered a “standing project neutral”. In some circumstances, however, a DRB may be used in an on-call basis. For example, the FIDIC and World Bank agreements call for the use of what is variously called a Dispute Board, Dispute Advisory Board, or Dispute Adjudication Board, which does not meet regularly with the parties, but hears claims only on when called upon.
II. The 2007 AIA and ConsensusDOCS Standard Forms
A. AIA’s Initial Decision Maker
The IDM’s duties are set forth in Article 15.2 of A201-2007, General Conditions of the Contract for Construction. The identity of the IDM is to be written into any owner/contractor agreement that incorporates A201-2007, including most agreements for design-bid-build and construction manager at risk project delivery. If the owner and contractor do not identify an IDM, A201-2007 specifies that the Architect will serve in that role by default.
Except for a few types of claims that may go directly to mediation, either party must submit its claim to the IDM for an initial decision as a condition precedent to mediation. Because mediation is a condition precedent to any form of binding dispute resolution, the IDM’s initial decision is the first, required step in the A201 dispute resolution process.
The AIA’s 2004 Design-Build family of documents also employs the initial decision process. Those documents introduced a third-party, called the Neutral, to assume the traditional dispute resolution role the Architect held under AIA agreements for design-bid-build.
B. ConsensusDOCS’ Optional Neutral/DRB
The ConsensusDOCS 200 in Article 12, “Dispute Mitigation and Resolution”, allows the parties to select an optional “dispute mitigation procedure” as an alternative to mediation. Under the “check the box” format, the mitigation options include either a Project Neutral or a DRB. Generally, the ConsensusDOCS follow the traditional DRB model where the DRB makes periodic site visits and issues non-binding findings on claims. The DRB has to issue its findings within five days, or the parties can proceed directly to arbitration or litigation. Article 12 of the ConsensusDOCS provides only rudimentary details regarding how the DRB is to be established and run. For that reason, if the parties select the DRB option, some of the topics that are covered in this article should be addressed by making additions to Article 12 of the ConsensusDOCS form.
III. Setting Up The Process
A. Industry Resources For IDMs and DRBs
The AIA does not provide an IDM agreement, but The American Arbitration Association (AAA) has written IDM Procedures, available on the AAA’s website (www.adr.org), that discuss the IDM’s selection, impartiality, scope of authority, compensation, and limitation of liability, among other things. The AAA will also provide an IDM from its national panel of Neutrals, so the same individuals whom the AAA has prequalified to serve as arbitrators and mediators may serve in the role of IDM.
The Dispute Resolution Board Foundation (DRBF) has a DRBF Practices and Procedures Manual on its website, www.drb.org. The Manual thoroughly covers how to set up and implement a DRB, and provides sample specifications, operating procedures, and Three-Party Agreements among the owner, contractor and DRB members. The DRBF also provides training that covers ethical and professional duties, as well as the nuts and bolts of managing the DRB process. The FIDIC form of contract can be found at www.fidic.org and the World Bank form at www.worldbank.org. Also, the American Arbitration Association has published DRB Guide Specifications, available from its website.
B. Selection Criteria
The importance of subject matter expertise for IDMs is critical. Many disputes arise over whether the contractor has performed according to the relevant plans and specifications and, in many cases, the first thing the initial decision maker will have to do is read and analyze those documents. For building projects, architects are well qualified to make those analyses. They also understand the construction process and the appropriate roles of the owner, architect, and contractor. Other disciplines, including construction lawyers, can fill the IDM role, but whoever is selected as the IDM should have a good understanding of the design and construction process.
Selecting the right neutrals for the DRB is the most important element—a great process on paper or in the contract can be derailed if the right people are not selected. First, subject matter expertise is important—after all, the DRB is giving an opinion on the substantive merits of claims that often involve complex engineering or construction issues. Second, DRB members should be trained on the DRB process and principles so that they understand their role and can properly manage the responsibilities that they have been given. Third, DRB members should have experience in claim resolution processes as they are acting as part of a larger process to resolve issues without resort to traditional arbitration or litigation.
Architects who are AIA members are governed by the AIA Code of Ethics, which is published online at www.aia.org. Rule 3.202 states that AIA members are required to render decisions impartially when acting under agreements to interpret contract documents and judge contract performance. The commentary to the rule specifically notes that the rule applies even though the member is being paid by the owner. A201-2007 also imposes a duty of neutrality on the architect at Section 4.2.12. It states that, when making interpretations and decisions, the Architect is not permitted to show partiality to either owner or contractor.
To maintain neutrality throughout the project, both the initial and continuing duty to disclose potential conflicts of interest should be covered in the IDM agreement. However, that duty should be tempered with an opportunity to waive conflicts in order to continue utilizing the services of a competent IDM whom both parties have previously agreed to use and continue to have confidence in. The initial decision is not the equivalent of an arbitrator’s decision. For that reason, a “hair trigger” with respect to apparent conflicts, as we sometimes see in arbitrator selection, could derail the process unnecessarily.
DRB specifications usually require that DRB members be neutral and objective. To that end, many specifications identify conflicts of interest that prohibit a DRB member from serving on a particular contract, such as having an on-going consulting relationship with one of the project participants. Other conflicts or potential conflicts must be disclosed and may be waived as, for example, a past relationship with one of the project participants. It is important to remember that for DRB members the “no conflicts” rule applies throughout the term of the contract, so serving on a DRB may prohibit certain employment opportunities for a number of years. Likewise, during the course of the project the DRB members must retain their neutrality, including in their conduct with the parties.
A. Cost of On-Call vs. Standing Neutral
It can be costly and time consuming to educate a party about the project so that he or she can serve as the IDM. For that reason, the AIA assumes that, in most cases, the Architect will serve as IDM by default and another party will be brought in as IDM only on larger, more complex projects where the project can afford the hourly rates of the outside IDM as well as the other costs to educate the IDM. Serving as an IDM is a basic service under the AIA’s owner/architect agreements, but when another party serves as the IDM the Architect may be paid additional services to assist or provide training to the IDM.
The owner/contractor agreements are silent regarding who pays the IDM, which effectively makes the IDM a cost of the project for the owner to bear. Many observers have suggested that the owner and contractor should share the IDM cost. If desired, that cost sharing can easily be made explicit in the owner/contractor agreement.
Some parties believe that costs of having standing DRBs is too high and for that reason alone appoint only on-call DRBs that do not act unless and until a formal claim needs to be heard. Although the cost of periodic site visits by a standing DRB initially is higher than for the on-call DRB, the perceived savings may be illusory because the process of getting the on-call DRB up-to-speed on the issues may cost as much, if not more, than the cost of regular site visits. The benefit of the regular site visits is that the standing DRB becomes familiar with the disputed issues and has a chance to build up the credibility with the parties that the periodic site visits foster. Moreover, at the periodic site visits the DRB has the opportunity to head off disputes by getting the parties together to talk about project challenges and solutions—sometimes the mere presence of the DRB brings issues to the fore and allows the parties to deal with them then and there.
The IDM procedures in A201-2007 do not put a restriction on direct communications with either party to a claim. In fact, Section 15.2.3 specifically states that the IDM may request information from any party as it goes about evaluating the claim and making its decision. If the Architect is performing construction contract administration, he/she may be attending project meetings on a regular basis that the owner and the contractor would also attend, and claims could be discussed at those meetings. An IDM who is not the Architect would be on-call only and not involved with project participants until asked to make an initial decision. Therefore, it would be unusual for those IDMs to communicate with the parties except regarding claims being decided.
The DRB normally is prohibited from ex parte communications with the parties, except for administrative matters. Most communications go through the panel chair and all parties are copied on everything. The standing DRB members do, however, regularly communicate with the parties on site visits. Even on site visits DRB members need to be careful in their conduct so as to maintain their neutral and objective role—this does not mean that DRB members need to be robots, but they must walk the line between familiarity that promotes confidence and familiarity that may breed suspicion.
V. Dispute Process
A. Submission of Claims
Per A201-2007, a claim must include substantiation, a cost estimate, and an estimate of the probable effect on the schedule. The IDM has only 10 days to act on the claim, and can do one of five things: (1) ask for supporting data, or a response from the other side, also with supporting data; (2) reject the claim; (3) approve the claim; (4) suggest a compromise; or (5) advise that it is unable to make a decision, either because it lacks enough information, or, “in its sole discretion” concludes it would be inappropriate to render a decision. The process is intended to be quick, so if the IDM requests more information, the party to whom the request is made has only 10 days to provide the information, and the IDM has to make a decision upon receipt of the information. If the IDM fails to decide, then the parties are free to take the claim to mediation 30 days after sending it to the IDM.
The IDM is permitted to seek information from either party and also from experts, without restriction, and may request that the owner retain experts at the owner’s expense, if the IDM needs their opinions to decide the claim. Of course, if the owner has to retain experts not already on board, then the schedule would have to be extended.
DRB specifications and/or DRB procedures established at the beginning of the project govern the dispute submission process, so it may vary from project to project. Usually, the contract will specify a notice of claim and a negotiation process before the claim is presented to the DRB. The claim presentation is made via position papers and supporting documents that are sent to the DRB to be read before the DRB conducts a hearing. The position papers and supporting documents usually comprise a three ring binder’s worth of paper. The parties may also send presentation materials (usually Power Points) to the DRB before the hearing.
The IDM process doesn’t mention hearings, but the AAA IDM procedures realistically account for the possibility of conference calls and meetings. Although hearings are not precluded and could be held, the A201 drafters intended an informal and expeditious process without the formality that a hearing would introduce.
DRBs almost always hold hearings, but they are relatively informal as compared to arbitration or litigation. The operating procedures usually provide for the claimant to present first, then the respondent, followed by rebuttals until the claims have been addressed to the satisfaction of the DRB. There are no trappings of arbitration or litigation hearings, such as swearing of witnesses, recording of the proceeding, cross-examination, motions, and the like. In essence, the hearing is simply a presentation by project participants about what happened and the reasons why the amount requested should, or should not, be paid. Another feature of a DRB hearing is that the DRB members usually ask detailed and focused questions of the parties—it is akin to a “hot bench” when arguing an appeal in court.
C. Role of Lawyers
Both A201 and the AAA procedures are silent with respect to the representation by counsel. There’s nothing written in A201 that would prohibit them from appearing at meetings, and nothing prohibits the IDM from speaking to a party’s attorney when seeking additional information. If lawyers are involved, however, they are most often behind the scenes at this stage of the dispute.
Generally, most DRB specifications are not “lawyer friendly.” For example, some DRB specifications require that all members of the DRB have construction subject matter expertise, which may by definition exclude lawyers. Some owners require that a lawyer serve as panel chair because these owners believe that a lawyer as chair can add to the DRB an appropriate consideration of legal and process issues, while still retaining the basic character of the DRB as a “panel of subject matter experts.”
Lawyers are usually not present at DRB hearings. Sometimes they will be present to address legal issues, if requested by one or more of the parties and approved by the DRB. Often, however, lawyers will assist in preparing parties for their presentation to the DRB and reviewing papers before they are submitted to the DRB, but it is rare for a lawyer to be present and active at a DRB hearing.
The IDM’s complete scope of services and authority are covered in Article 15 of A201. The IDM makes an initial decision on claims, and claims are defined to include disputes arising under the contract. Some claims are carved out of this process. Claims related to hazardous materials, emergencies, and the owner’s duties as a fiduciary of insurance proceeds do not require an initial decision and may proceed directly to mediation. Also, the IDM’s authority is limited to making decisions on claims arising only between the owner and contractor, unless the IDM and all parties affected by the potential decision agree.
The IDM has no power over the parties other than by its decision, and it can only decide on the basis of the information it has received. A party that does not cooperate in the process assumes some risk, because an IDM that does not have all the information that it needs to reach a decision may simply find against the non-cooperating party.
Like the IDM, the DRB is a creature of the parties’ contract, so its scope of authority will be dictated by any limitations that the parties prescribe. Some specifications will explicitly carve out issues that the DRB cannot rule on, such as injunctive relief or punitive damages. It is advisable when setting up the DRB process to consider what issues, areas and/or relief are “off limits” to the DRB. In general, however, it is better to give the DRB broad authority within the four corners of traditional contract-based claims—more questionable would be tort claims and equitable relief. Although most DRB decisions are non-binding, it is better to present to the DRB only those issues that it is best equipped to handle since it is more likely that the parties will accept decisions made on that basis.
The DRB has only persuasive, not sanctioning powers. Therefore, the DRB cannot “force” a party to do something, but it does have the ability to take cooperation (or lack thereof) into account in its findings and recommendations. Unless the DRB’s findings and recommendations are admissible in subsequent proceedings, the non-binding DRB decision, based on admonishing a party for non-cooperation, can simply be ignored—it is rare, however, for a party not to cooperate with a DRB.
A. Form of Decision
As set forth in A201-2007 at Section 15.2.5, initial decisions have to be in writing. They also have to approve or reject the claim, state the reason for the decision, and advise the parties of any change in the Contract Sum or Contract Time.
The DRB decision is usually in writing and quite detailed. It typically covers the following topics:
- The issues presented and the relief requested
- A summary of the parties’ respective positions on the issues
- The DRB’s analysis of the merits of the parties’ positions and the claim, and
- The DRB’s recommendations, which are usually short and to the point.
The DRB usually will be asked to decide entitlement only, on the assumption that if liability is agreed upon, then the parties are in the best position to negotiate a price for the claim. However, sometimes the parties will ask the DRB to decide price and time issues as well, or the DRB can remain available to hear these issues if the parties cannot come to an agreement on price and time.
It is important to note that the DRB does not act as a mediator or opine as to what it deems to be a “fair” outcome; rather, it gives its opinion on the proper outcome of the claim, on the merits.
B. Final and Binding?
IDM initial decisions are final and binding, but that may be temporary, because initial decisions are subject to mediation. Initial decisions have always been binding because their purpose is to keep the project moving and not allow it to get bogged down in costly delays. Once a decision is made, both parties have to act on it. The Architect is required to issue change orders based on the initial decision and the contractor or owner may be paid in the next month’s pay application. Ideally, the dispute is resolved in 10 or 20 days, and everyone moves on. Also, unless appealed to mediation prior to final payment, the decision becomes final and no other steps are required to resolve the dispute.
A new provision in A201-2007 at Section 126.96.36.199 provides a process for obtaining finality of the decision prior to final payment. It works by allowing one party to demand that other party file for mediation of the decision within 60 days. If the other party does not file for mediation within 60 days, then both parties waive the right to pursue mediation, or any binding dispute resolution, of the decision in the future. This right is optional, and one that would likely be exercised only by the party that was satisfied with the decision.
As noted above, DRB decisions usually are non-binding. Sometimes, however, owners and contractors will agree in advance to abide by the DRB’s decision on a particular claim. Other specifications provide that all DRB decisions up to a certain dollar threshold are binding and all above that threshold are not, but a binding DRB decision is somewhat of an anomaly. The FIDIC and World Bank standard contract terms result in a decision on the merits that is “temporarily binding,” meaning that the parties must follow it unless and until it is modified by agreement of the parties or it is later overturned through arbitration or litigation after project completion. In most instances this makes the decision binding as a practical matter, since very few are overturned in subsequent proceedings.
DRBs work best when they have credibility with the parties based on their subject matter expertise, project-specific knowledge, and neutrality. Some practitioners feel that DRB decisions should always be non-binding because a binding decision could drive the parties farther apart in their negotiations and make the disgruntled party hostile to the DRB process and the DRB itself, thereby making it less effective in resolving disputes on the project. The DRB is in place for the life of the project, performs some dispute avoidance functions, and renders its decisions based on a relatively informal process both as to documentation and the hearing process itself. Making the outcome binding could subvert the underpinnings and benefits of the DRB process objectives as a whole.
VIII. Effect of Decision—Admissible or Inadmissible?
Nothing in A201 prevents the introduction of the decision as evidence. Given its role as the first step in the claims process, the party making a claim actually has to demonstrate that it received an initial decision. If not, the claim is not ripe for further dispute resolution.
DRB specifications vary on admissibility vs. non-admissibility. The DRBF recommends that DRB decisions be admissible, the rationale being that if they are admissible the parties will take a recommendation more seriously even if it is non-binding. The ConsensusDOCs 200 also specifically states at Section 12.3 that the DRB’s finding may be introduced as evidence in a subsequent binding adjudication. Some practitioners believe that making the DRB decision admissible is not a good idea since the prevailing party will become more entrenched in its position even if the decision is non-binding. Also, admissibility in a later proceeding will only transfer that fight to another forum, with the focus shifting to why the subsequent forum should adopt, or not adopt, the DRB’s recommendation. The DRB process is intentionally informal without rigorous process protections, so if a DRB decision is admissible, the result would be to use the product of an informal process in a formal subsequent proceeding without the normal protections of the adversarial process.
IX. Cost Effectiveness of Project Neutrals
The initial decision process is very cost effective. The purpose of the initial decision is to get a prompt decision that will keep the project moving forward and avoid delay. The initial decision achieves that purpose because it is an efficient process, with specific time constraints, and it results in a binding decision.
Importantly, the initial decision is the first step in the disputes process, not the second or third. Parties on construction projects usually try to resolve their issues informally, but some contracts require parties to engage in stepped negotiations with formal time periods before they can proceed to a neutral’s decision. Those formal time periods lengthen the process and some parties abuse them to further extend the time. By contrast, under A201-2007 the parties can receive an initial decision in 10-20 days, and proceed to mediation in 30 days if no decision is issued.
If the Architect serves as the IDM, the process is quite economical, because rendering decisions on claims is a basic service under AIA owner/architect agreements. If the IDM is not the Architect, then the costs will rise, but in a large complex project, those costs pale in comparison to the costs of the delay that can result when there is no initial decision.
The DRB process should be viewed as a risk management investment in dispute avoidance and resolution. There is no doubt that it is commonly viewed as an extra project cost, and on smaller projects it can be viewed as an unacceptable percentage of overall project cost. However, the costs to a project of only one arbitrated or litigated claim on a project will far exceed the cost of a DRB, not to mention the transactional costs of tying up project personnel, loss of good will between the parties, and the expenditure of resources on non-productive activities. A properly selected and managed DRB will pay for itself in avoided claims and process costs on most projects. Also, DRBs can be scaled to the size and complexity of projects—larger projects warrant (and can support) a three-person DRB, but smaller ones can use single person DRBs with their smaller carrying costs.
The use of project neutrals provides a cost-effective, flexible way to implement “real time” dispute prevention and resolution of project conflicts and disputes, and thus avoid costly arbitration and litigation processes.
The initial decision provides certainty to the parties for a very low cost, in a very short time. In the best of all worlds, if neither party requests mediation of the initial decision, it becomes final upon final payment and the parties do not have to spend more time and money resolving the dispute.
The DRB process is an informal, party driven process. The DRBF has data that supports a 98% success rate in resolving claims brought to a DRB, so the DRB process has a proven track record of working effectively in its traditional format.
Kurt Dettman is a principal of Constructive Dispute Resolutions in Hingham, Massachusetts, where he concentrates on alternative dispute resolution, including serving as a mediator, arbitrator and dispute review board member on various projects. Kurt is also the New England Representative of the Dispute Resolution Board Foundation. Suzanne Harness is President of Harness Project Solutions in Arlington, Virginia, which provides procurement consulting, mediation, and arbitration services. John Carpenter is an Assistant General Counsel with Kiewit Construction, founded in 1884 and now one of largest construction companies in the country.